FTC Blocks Small Physician Group Deal

On June 22, 2017, the Federal Trade Commission and the Attorney General of North Dakota filed a complaint to block Sanford Health’s proposed acquisition of Mid Dakota Clinic, seeking a temporary restraining order and preliminary injunction to stop the deal and to maintain the status quo pending an administrative trial on the merits of the case.

The FTC’s complaint alleges that the deal would reduce competition for adult primary care physician services, pediatric services, obstetrics and gynecology services, and general surgery physician services in the greater Bismarck and Mandan metropolitan area or four counties.

According to the complaint, Sanford and Mid Dakota are each other’s closest competitors in a four-county Bismarck-Mandan region of North Dakota, an area with a population of 125,000. The FTC’s complaint alleges that the transaction would create a group of physicians with at least 75 to 85 percent share in the provision of adult primary care physician services (59 out of 77 physicians in the area), pediatric services (10 out of 12 physicians), and obstetrics and gynecology (15 out of 17 physicians) services. Moreover, the complaint alleged that the merged firm would be the only physician group offering general surgery physician services in the relevant geographic market with a total of ten physicians. In total, the two firms would combine approximately 94 physicians in the relevant geographic market.

The FTC also alleges that the possibility of future entry or expansion of services and facilities by other healthcare providers is unlikely.

The FTC’s concern is that the combined physician group would be able to raise reimbursement rates to insurers that would then raise premiums to consumers in the local market.

FTC Precedent

If this case seems really small, well it is. But, this is not the first time that the FTC has blocked a very small physician group merger.

On January 24, 2014, the FTC successfully blocked St. Luke’s Health System’s acquisition of Saltzer Medical Group, a 44-doctor physician practice group. The federal court found that the deal would have created a dominate single provider for “adult primary care physician services sold to commercial health plans” in a geographic market “no larger than the five zip codes that encompass Nampa and Caldwell, Idaho.” It was a horizontal combination between direct competitors for the provision of primary care physician services. The court found that the combined entity would have “80% of the primary care physicians in Nampa” and that health care costs would likely rise given the merged entity’s ability to negotiate higher reimbursement rates with commercial health care plans that would be passed on to consumers.

Basically, Nampa, at the time, had a population of 80,000 people. The deal combined St. Luke’s eight primary care physicians and Saltzer’s 16 primary care physicians to give St. Luke’s 80% of the adult primary care physicians in a five zip code area.

St. Luke’s basically accepted the product market definition and was unable to prove to the court that the geographic market was wider than the five zip code area. Once the court concluded that the market was limited to Nampa, the court found that the merger was presumptively anticompetitive given that the physician group merger combined 80% of the adult primary care physicians in the local area. The court also found that the claimed efficiencies of the deal were not cognizable or merger specific and that entry was not likely.

So, the Sandford/Mid Dakota deal is larger and more complicated than the St. Luke’s deal.

Lessons Learned

The FTC’s latest enforcement action demonstrates that the FTC continues to focus attention on the health care industry. Here, the FTC alleges that competitive harm is likely to result from the merger of two physician groups in a four-county Bismarck-Mandan region of North Dakota. This action means that the FTC is willing to block small physician group acquisitions in very narrow product and geographic markets. Given the FTC’s demonstrated willingness to aggressively investigate and litigate small health care transactions, physician groups contemplating mergers or acquisitions – even if not HSR Act reportable – should consult antitrust counsel in the early stages of considering a transaction. Antitrust counsel can help physician groups understand the potential antitrust risks that they may be taking by entering into an agreement. Antitrust counsel can also review and recommend potential alternative transaction structures and assist in identifying potential merger-specific efficiencies that may minimize the risk of potential litigation.

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